Back on the 24th September 2009, the National Futures Association (NFA) required, amongst other things, that beginning on 30th November 2009 all Forex Dealer Members (FDMs) must collect a forex margin or customer security deposit of at least 1% for currencies listed in Section 12 and at least 4% for all other currencies.

The currencies that are listed in section 12 and qualify for the 1% security deposit are the British pound, the Swiss franc, the Canadian dollar, the Japanese yen, the Euro, the Australian dollar, the New Zealand dollar, the Swedish krona, the Norwegian krone, and the Danish krone.

The NFA probably sought to make sure that the clients’ funds are safer, and the forex margin changes result to a bigger portion of their funds locked in the security deposit. But a collateral outcome of this is a forced reduction of leverage. Not a bad thing at first glance, as it is a well known fact that many new traders are very quickly beaten by the market when they use very high leverage such as 1:200 or even 1:400 in some cases.

On 1st of December 2009, the Financial Industry Regulatory Authority (FINRA) amended rule 2380 to require broker/dealers to limit the leverage forex customers could use to 4 to 1. That is much lower than the standard allowed in over-the-counter (OTC) foreign exchange or futures market which is between 25:1 and 100:1 but much greater than 1.5:1 originally recommended in the rule.

FINRA regularly makes referrals to NFA or the Commodity Futures Trading Commission (CFTC) when it receives information related to activity outside its jurisdiction. Thus unsurprisingly on the 13th January 2010 the CFTC proposed to limit leverage in retail forex customer accounts to 10:1.

This proposal has put the whole currency trading community in fervor. Under the proposed regulations, all retail forex customer accounts in the United States would be subject to a maximum leverage of 10:1. This means that a vast majority of retail currency traders would suffer a ten times increase in their margin requirements, assuming they use 100:1 leverage.

In simple terms, if you use 100:1 leverage you are able to control a $100,000 standard sized currency lot with $1,000 in your margin account. At 10:1, you must maintain $10,000 per $100,000 standard lot. The same holds true for micro and mini accounts of an overwhelming majority of retail traders. Under 10:1 leverage a trader would need to maintain $1,000 for every $10,000 mini lot, or $100 for every $1,000 micro lot traded.

The increase in margin will also translate to a decrease in pip value, modifying the overall profit and loss per pip on every trade. The CFTC’s seeks to reduce the damage a trader can do to their capital by reducing the leverage available to them, all in the name of consumer protection. However, a vast majority of these retail traders are disgruntled by the proposed rule.

Francesc Riverola, CEO & Founder of FXStreet.com, and many of the fellow bloggers at FXStreet.com have commented on the proposed change to margin requirements by the CFTC.

“CFTC to Kill US Retail Forex Market”  

How do they pretend traders not going offshore and forcing to close their doors to all US FDMs by limiting leverage 10 to 1???? while overseas you can have much bigger leverages like 200 to 1 in UK????” 

- Francesc Riverola 

Major currency dealers are also seriously concerned that the margin requirements will kill retail trading in the United States. They have formed the Foreign Exchange Dealers Coalition (FXDC) to provide a unified front in Congress. The Coalition released a statement against the CFTC’s proposal, and it clearly lays out a case for retail currency trading in the U.S.

They argue that the US retail forex industry is a $1 billion industry, providing solid jobs, and they are concerned that forex margin changes will drive small retail customers offshore. The result will be less fraud protection for the retail trader, a loss of jobs in the United States, and no significant gain in consumer protection as a result.

On the other hand, on the 22nd of March 2010, in a letter to Mr David Stawick secretary of the CFTC, Mr Thomas Sexton vice president of the NFA writes “the NFA applauds the Commission for proposing these rules, which will both provide important protections to retail customers, and bring greater regulatory certainty to the retail forex industry.” This obviously contradicts the arguments of the FXDC.

We also do not believe that this proposed rule will provide protections to small retail traders because most of them will move their forex accounts to foreign waters where they will be at the mercy of ruthless forex sharks. And this might well lead to the destruction of the retail forex industry in the United States. But up to now no decision has been taken, and the whole community is in wait and see mode.  

On Monday the 30th August 2010, the CFTC announced its decision about the forex margin changes. It took the CFTC a lot of time, but they finally finalized their ruling for forex. Indeed, for the major currencies such as the EUR/USD and GBP/USD, leverage will be limited to 50:1. This decision will come into effect on 18th October 2010, and this will surely affect the structure of the forex industry in the US. And the debate is still going on: Will American traders stay with their American brokers?